“We’re approaching a danger zone where bond prices could plunge,” Yoshimasa Hayashi, the Liberal Democratic Party’s shadow finance minister said in a Dec. 20 interview at his office in Tokyo. “It’s very important to be implementing a fiscal rehabilitation plan by 2012,” when baby boomers born after the war will start receiving state pensions, he said.

Surging bond yields would force the government to devote more funds to service debt, undermining Kan’s stimulus efforts. He has pledged to balance the budget by 2020 and pared back the campaign promises that helped his party end the LDP’s half century of almost unbroken rule. Japan’s total debt burden jumped 85 percent during the LDP’s last 10 years in power.

The opposition is working on what it calls the “X-Day” project, to fend off a potential bond market rout, said Hayashi, 49, a former Economy Minister.

“There are many worrisome spending initiatives” in Kan’s budget proposals, such as raising childcare allowances and handouts for farmers, Hayashi said. The government has yet to explain how it will finance a planned 5 percent cut in corporate taxes, which will cost at least 1.5 trillion yen.

Kan aims to freeze annual budget spending at 71 trillion yen for the next three years and cap bond sales at 44 trillion yen in the 12 months starting April 1, the same as this year’s record level.

Risks to Economy

Bank of Japan Governor Masaaki Shirakawa yesterday warned about risks to the economy from rising bond yield. Benchmark 10- year yields rose more than 40 basis points in the past two months to as high as 1.279 percent. The 10-year, 1.2 percent Japanese government bond was recently trading at 1.145.

Japan’s Finance Ministry forecasts long-term debt in the year ending March 31, 2011, will reach 868 trillion yen, about 180 percent of gross domestic product. Household assets rose 0.3 percent in the third quarter to 1,442 trillion yen from a year earlier, according to the Bank of Japan.

The narrowing gap is especially alarming for Japan, where more than 90 percent of public debt is held by domestic investors.

Hayashi said the gap between the two will shrink as an aging population forces the government to spend more on social security and families use up more savings.

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if the pensioners don’t want JGBs just stop issuing them.
instead of rolling over bonds, let them roll off until
the private sector runs out of JGBs, then watch the insurance company rentiers come begging the govt for more risk-free collateral and the game can begin anew. But at least the exercise will have exposed the true dependent.

“The premier tapped some 7 trillion yen from unused accounts and reserves to pay for the plan, including money from a foreign-exchange reserves account and accumulated funds belonging to a government-affiliated railway agency. Finance Minister Yoshihiko Noda has said the government needs to find a more sustainable source of funds.

“Such extraordinary debt and low tax revenues obviously point to the need to raise levies, especially sales tax,” said Yoshiki Shinke, senior economist at Dai-Ichi Life Research Institute in Tokyo. “The real obstacle is a lack of political leadership.”

The ruling Democratic Party of Japan lost ground in mid- term elections in July after Kan proposed increasing the nation’s 5 percent sales tax to restore finances. Kan’s Cabinet approval ratings fell to 21 percent, the lowest since taking the office in June, the Asahi newspaper reported on Dec. 13.”

“The central conceit behind official thinking about fiscal policy on both sides of the aisle is that investors will buy almost all U.S. government debt without blinking an eye or increasing Treasury yields. This is an endearing and heart- warming notion, rather like a seasonal showing of Jimmy Stewart in “It’s a Wonderful Life.”

What it should do is force us to think about how much the world has changed and how antiquated such ideas are today.

The U.S. is steadily losing its global economic and financial predominance. To be sure, we offer the largest amount of government debt on the market, but investors have plenty of choices around the world, both in terms of debt and other assets. The idea that our Treasury market will be buoyed by captive investors, whether the Chinese central bank or anyone else, is quaint and at odds with today’s reality.”

This is an endearing and heart- warming notion, rather like a seasonal showing of Jimmy Stewart in “It’s a Wonderful Life.”

Or even more endearing and heartwarming, the thought of a benevolent plutocrat who spends his time and fortune searching the globe to identify (and reward!) the most worthy of academics and public officials. The way they all seem to share certain economic beliefs… I guess all nice people really are alike!